Institutional investors that are integrating environment, social and governance factors into their decision-making process are taking note of Facebook Inc.’s latest troubles.

Back in March, MSCI Inc. downgraded Facebook’s ESG ranking from BBB to BB. Its less-than-stellar rating of BBB before the downgrade was due to what MSCI called “long-standing concerns . . . with Facebook’s handling of privacy and data security issues, which has consistently lagged industry peers.” Microsoft Inc., by contrast, maintains MSCI’s highest rating of AAA due to its above average employee compensation and benefits, as well as its technology’s positive impact.

Read: Few U.S. pension plans integrating ESG into investment manager selections: survey

In the case of Facebook, it’s 2018 shareholders meeting in May was rough. Those in attendance raised a wide variety of governance problems and inadequacies during the question and answer portion, including the company’s questionable ability to protect its users’ data from nefarious third parties, the site’s role in spreading Russian propaganda during the lead-up to the 2016 U.S. presidential election or its failure to respond strongly enough in stemming abusive behaviour such as sexual harassment on its platform.

Consumer backlash has led to tangible drops in stock prices, with Facebook’s price falling up to 18 per cent in the weeks after details emerged about the Cambridge Analytica Inc. scandal. The uproar started when it came to light that the political consulting firm had been collecting personally identifiable information on tens of millions of Facebook users, allegedly with the aim of using it to influence voting populations relevant to the politicians who hired the firm. 

For U.S. equities, however, it’s key to understand the role that so-called FAANG (an acronym for Facebook Inc., Apple Inc., Amazon.com Inc., Netflix and Google) stocks have played in the overall prosperity that U.S. markets have experienced in recent years, noted Philip Lawlor, managing director of global markets research at FTSE Russell, in a recent blog. He wondered what other sector will take up the baton if these companies begin to stagnate and investors can’t rely on them as the blue-chip leaders they’ve been?

Read: Hefty equity returns lead to strong gains for U.S. institutional investors in 2017

Within the technology sector more broadly, investors have seen such a concentrated and consistent growth in valuations in a limited number of individual companies, says Chee Ooi, a managing director and senior portfolio manager for the active quantitative equity team at State Street Global Advisors Ltd. Valuations have been so rich that some of the risks associated with these companies have been pushed off the radar for some investors, he says.

“I think what happened in February, as some of these issues come to centre stage, I think only then did investors start to think that from a data privacy and protection standpoint, there are some issues and there are potentially business issues for these companies,” says Ooi. “I think you can definitely see that in how the European Union has been taking a more proactive role with [the General Data Protection Regulation] that they came up with in late May. And the fines that they are now starting to impose on some of the companies are actually starting to be sizeable enough to bite.”

Another major technology player, Amazon.com, has seen numerous labour dispute issues over the last year. Employees who suffered on-the-job injuries reported being left without compensation and unable to work due to their injuries, even to the point of becoming homeless as a result, in some cases, as discovered by the Guardian.

One employee was sent home without pay when she couldn’t work due to a back injury caused by an improperly equipped workstation, reported the newspaper. Once on worker’s compensation, she went into physical therapy, but when she was able to return to work, she suffered a similar injury since her workstation still hadn’t been fixed. Eventually the woman ran out of medical leave and when an MRI scan showed her back was still injured, Amazon’s workers compensation insurer instructed the company doctor to drop her as a patient, she told the Guardian

Read: Japan a hotbed of ESG activity

Unions in both Germany and Spain have called for strike action against the company over workers’ rights. And New York-based labour watchdog China Labor Watch released a report in June that found workers in Chinese factories where Amazon Echo speakers and Kindle e-readers are made have reportedly had to work more than 100 hours of overtime each month, in violation of Chinese labour laws, according to the Financial Post.

The relationship between technology companies and employment as a broader societal issue, whether it be questions of artificial intelligence or job trends, will become increasingly scrutinized in the years to come, says Ooi. “These are potentially going to have a pretty disruptive effect on employment, on work conditions and on welfare of their communities in general,” he says. “And I think those are more long-term issues that are front and centre right now.

Read: Is gun control the next big ESG issue for institutional investors?

“But the traditional view on a lot of these companies has been that they are good corporate citizens; they tend to treat their employees very well. I think, in most cases, that is still true. There are always one or two cases you can point to as an anomaly, but I think that, in general, that is still pretty applicable for most companies that are in the technology space.”

But the added dimension is the impact on employment dynamics more broadly, adds Ooi. “You can talk about impact on the community in general. Is it good that we are buying stuff online now, leading to the decimation of the ‘mom and pop’ small business? And you hear conversations here and there, but I think it is going to be even more elevated with more conversations, especially in artificial intelligence.”

By and large, the role of major investors is definitely to push for more transparency, says Ooi. “Then we can have a better gauge on who are the good guys and who are the bad guys. And I think that over time that should foster a higher standard.”

Read: Investors cite returns, risk management as drivers for ESG integration

Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

Join us on Twitter

Add a comment

Have your say on this topic! Comments that are thought to be disrespectful or offensive may be removed by our Benefits Canada admins. Thanks!

* These fields are required.
Field required
Field required
Field required